How We Made Gold Ownership Legal After 50 Years Of Federal Prohibition

Background to the Gold Bullion Coin Act, Which Created The American Eagle Gold Coins

by Joe Cobb, M.B.A. (University of Chicago)

Here is an analysis of my first proposal in Congress, which was initially introduced by Rep. Dan Crane (R-IL). My good friend from our university days in Chicago, Bill Mencarow, was a principal staff aide to Congressman Crane, and he helped draft the bill and convince Congressman Crane to introduce it, H.R.3789, in the 97th Congress.

This later became the only legislation Ron Paul introduced that has become law. It was drafted and introduced initially in 1983, when I was serving as his aide on the Coinage Subcommittee of the Banking Committee, in the 98th Congress.

He hired me in 1983 because we shared a common idea about the future role of gold in the international monetary system. He still believes in this ideal, that gold – only gold (by weight) – can be the natural unit of “money.”

I want to tell you the story of how the coin bill became law, after Ron Paul departed from Congress (it was enacted the following year, because I was still there working in Congress).

Ron Paul had served on the U.S. Gold Commission, appointed by Secretary of Treasury Donald T. Regan in June 1981, to examine the role of gold in the national and international economy. The Report of that Commission was published in March 1982 and it basically said gold has no role to play in monetary policy.

No role for gold: This has been the orthodox British Neo-Classical School opinion, both Keynesians and Monetarists, for about 150 years. The majority of the Gold Commission believed they had driven a stake into the heart of gold standard advocacy, which was strong at the end of the 1970s due to high inflation under Jimmy Carter.

Senator Jesse Helms had gotten authorizing legislation to study the role of gold as part of a compromise to give more U.S. dollars to the International Monetary Fund in 1978. Carter had never bothered to appoint members of this temporary study group. The Reagan Administration responded to Helms’ request to move forward. (I was a close friend of Howard Segermark, who was Jesse Helms’ aide on gold and economic issues. Segermark was the person who drafted Helms’ amendment to the IMF funding legislation in 1978.)

The U.S. Gold Commission also reported, and recommended, in favor of a different idea.

Milton Friedman had proposed a real gold standard, in which gold actually circulated as money. This was published in The Journal of Law and Economics,vol.4 (1961), “Real and Pseudo Gold Standards.” This article by Friedman originated as his half of a debate at the international society of classical liberals, the Mont Pelerin Society. Friedman favored floating exchange rates among currencies, and gold (by weight) was just another “currency” in his floating exchange rate system.

The gold commission recommended a non-legal tender gold bullion coinage. When the Gold Commission was announced by Secretary Regan, I saw an opportunity. The idea for a specific U.S. Mint coinage was my version of Milton Friedman’s idea, combined with F.A. Hayek’s writings on the denationalization of currency. I incorporated a 501(c)(3) educational group, which I named “U.S. Choice in Currency Commission,” playing on the name of the U.S. Gold Commission. My idea was to put a bullion coinage at the center of a Hayekian scheme for parallel currencies.

The example of the South African Krugerrand had been around since the early 1960s, when the parliament there created a legal tender bullion coin, denominated only by its weight: one troy ounce of gold in a 22 carat alloy. The paper monetary units of South Africa are known as “rand” (ZAR) but there has never been a fixed price of the gold coin in terms of those paper rand units. The Krugerrand had become in the 1970s the most popular and widely owned gold bullion coin on the market. Many other governments had also gotten into the bullion coin minting business. Canada’s Maple Leaf bullion coin was very popular because of its .999 purity. The United States Treasury bureaucrats were strongly opposed to any kind of gold coinage in the U.S. monetary system.

Creating the Gold Coin in Congress

One of the first things we needed, even before the Gold Commission had finished its report, was an example of what a new United States coinage would look like. The idea was to create a parallel monetary system for the United States – and for the U.S. government. A parallel monetary system would provide a genuine monetary constitution, as the public could choose to hold gold bullion coins and credit instruments denominated in such coins, or the public could continue to use the traditional “dollar” units just as today. [ click here to see my proposal more fully ]

If you read the text of the bill as written (H.R.3789, 97th Congress) it is clear how the expansion of gold circulation was intended directly to reduce the circulation of the Federal Reserve. The U.S. Treasury would engage in “reverse open market” transactions, issuing gold coins to the public – just as the Federal Reserve issues bank reserves to the financial system. But as the Treasury expansion of gold coinage would occur, a direct reduction in the Federal Reserve’s balance sheet would also occur.